Buffett’s Missed Airlines Bet

By Sam Mamudi

Reuters

Fear of flying (stocks)

In recent years famed investor Warren Buffett has been bold in talking up the prospects of US companies and the country’s economy in general. But even for a man who’s been willing to buys newspaper publishers, there’s one industry which he’s left well alone: Airlines.

In early March, Buffett reiterated his position, telling CNBC that the airline sector has “all the ingredients of a bad business.”

That’s certainly not what investors seem to think. As this Bloomberg story today points out, regardless of what Buffett says, airline stocks have been a pretty good investment

The Bloomberg U.S. Airlines Index of 10 carriers surged 35 percent in the first quarter, the best start to a year since at least 1999. Wall Street projects that gains are just beginning for Delta Air Lines (DAL) and US Airways (LCC), with both rated higher on average by analysts than 92 percent of U.S. companies, according to data compiled by Bloomberg.

After more than $58 billion in losses from 2001 to 2009 amid two recessions and rising fuel bills, carriers are heading for a fourth straight annual profit as they match seat supply to demand and fly planes fuller than any time since 1945. That’s drawing new investors such as Snow Capital Management LP and Leuthold Group while hedge funds are adding to their holdings.

Barron’s scribe and former Stocks to Watch chieftan Avi Salzman has been touting Delta all year, and in a Follow Up in this week’s issue he writes:

Delta Airlines stock, trading at $16.51, has risen a whopping 80% in the past six months and 27% since we pointed out its potential (“Gaining Altitude With Delta,” Jan. 7). Based on history, it would be logical for investors to pocket those gains. But catalysts ahead could keep the shares rising into the clouds for the foreseeable future.

Among other airlines, United ContinentalHoldings (UAL) stock has risen 60% in the past six months.

Betting against Buffett is never a sure thing, and history tells us airlines often disappoint — as Salzman notes, the NYSE ARCA Airline Index is down 63% since 2000. But it could be that factors such as the recent mergers that have brought consolidation, have helped the industry finally get its act together.

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There are 9 comments

APRIL 1, 2013 11:55 A.M.

George Costanza wrote:

If memory serves, WB did take a position in an airline back in the 90s and took a shellacking on it. Once burned twice shy.

APRIL 1, 2013 11:56 A.M.

fred wrote:

Does Barron's plan to continue to put up articles talking about Buffett's missed bets in various industries when their share prices increase over some short period of time? This once great publication has gone from one that discussed long-term value and gave interesting ideas to another version of the street.com. Now Barron's only way of staying relevant is to put out articles with Buffett's name since they think that will drive traffic to their website, regardless of the substance of the article.

APRIL 1, 2013 12:51 P.M.

Anonymous wrote:

george costanza is correct. I believe it was US Airways preferred stock. Looking at the long term, airlines have been a horrible business to be in as is true of most business with undifferentiated products.

APRIL 1, 2013 2:34 P.M.

Oshuneer wrote:

Buffett doesn't bet, he prefers to be sure. Airlines come in very different configurations. Investing in any of them requires a thorough understanding of the particular market segment involved as well as a high quality crystal ball. Today's take-off is tomorrow's hard landing. Buffett was wise to stay away.

APRIL 1, 2013 2:37 P.M.

I ester jesyer wrote:

Airlines have fixed their models and got their emotes behind them. Especially DAL definitely a new world now and time to invest

APRIL 1, 2013 3:09 P.M.

Bill Crawford wrote:

If you had been given 100 shares of four dominant airlines, PanAm, American, United and Delta, on the day of their original IPO's and reinvested all dividends, your holdings today would have NO value. However, you would have experienced wonderful gains in a number of quarters.

APRIL 1, 2013 5:04 P.M.

David Merkel wrote:

You're talking about a dead cat bounce in a small in a small industry mostly capitalized by bondholders that received shares in exchange for their defaulted bonds.

Hard to invest in industries that have so consistently destroyed capital.

APRIL 1, 2013 8:04 P.M.

Wilber wrote:

Barron's has made a fortune in airlines I suppose, hehe, NOT! It is possible I suppose to make and loose it in the same year. Airlines is an Obama bet, stay away!

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